The short-seller’s allegations focus only on Aphria and one other, small company. It has nothing to do with other cannabis stocks. Also, the negative report carries less substance than mainstream headline writers want to believe.
Since Aphria Inc. became the subject of a blistering short-seller attack earlier this week, we’ve been getting a lot of questions about the company – and the industry, in general – here at the National Institute for Cannabis Investors.
The most important thing I want you to know is that the short-seller’s allegations focus only on two publicly traded companies – Aphria and a small Canadian firm called SOL Global Investments. It does not affect any other company in the cannabis world, particularly any of the companies in our Cannabis Investor’s Report members portfolio.
None of the stocks in our portfolio do much, if any, business with Aphria.
The short-seller report does not say anything about the size of the cannabis market or the general quality of the product being grown in Canada; the legality of cannabis in Jamaica, Colombia, or Argentina (the three countries where the short sellers said Aphria had engaged in inappropriate transactions); or anything else.
The allegations are about Aphria and SOL – and no one else. And, importantly, the only thing Aphria has been guilty of so far has been doing a terrible job of responding to the allegations – even some of the easier ones to debunk – made against it.
So if you own a cannabis stock that is not Aphria, you can breathe easy – these allegations do not affect you or your stock. It’s akin to the infamous WorldCom or Enron scandals from the early 2000s – all of the charges against those two companies were true, but they did not affect other telecom or utility companies.
That said, Aphria still is among the top five cannabis companies in Canada, which is to say they’re among the most important companies in the space globally.
With so many members keenly interested in this unfolding story, I want to spend some time digging into the Aphria story for you. That includes whether or not you should lean in and buy its stock at a discount right now.
Let’s take a look…
Attack on Aphria Has Less Substance Than Headlines Indicate
There is less to the short seller’s report than meets the eye – a lot less. That’s not particularly uncommon with these types of critiques. In my more than 30 years in the financial industry, I’ve seen some real doozies that take tremendous leaps in logic to try to “prove” their point or just simply grab attention.
A different short seller made a set of allegations against Canadian processor Cronos Group back in August of this year. That’s the same Cronos now in discussions with Altria, the same company having the best December start of any major cannabis company in the world.
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The Institute can’t predict that the story will turn out as well for Aphria, but the allegations of the short seller do not appear to be as damaging as they seem on a first look.
There are three basic claims here against Aphria – negative cash flow, quality, and affiliated transactions at inflated prices – but we need take only one of them seriously.
Regarding negative cash flow, nearly every public Canadian and U.S. cannabis firm currently generates negative cash flow. They are in an early-days growth phase. That naturally takes investment not only in property and equipment – which is capitalized – but in personnel, rent, and other operating expenses that ding near-term operating cash flow.
As for the charge that Aphria is making low-quality product, the company’s primary focus was never on going the route of the organic and craft guys anyway. Its focus is on low cost. This approach is common among the large Canadian producers – Canopy Growth Corp., for example, has pretty much embraced that it is a quantity-first operation. That doesn’t seem to be hurting Budweiser‘s ownership in the beer industry. They put up big sales numbers and have huge distribution, yet there is opportunity for those smaller players that are growing elite-level product as a means of differentiation.
Like other large producers, Aphria does have a craft brand. But that isn’t even grown in the Leamington facility described so critically in the short seller’s report.
The final major charge the short seller makes is that the company has an ongoing habit of purchasing assets at inflated prices from companies in which Aphria insiders have an interest. This is a very serious charge and, if true, would require many of the company’s executives to face fines, bars from associating with public companies, or even prison time.
In the short seller’s telling, the scheme works like this: A company the short seller says is an affiliate, SOL Global Holdings, purchases international assets at an inflated price from Aphria and SOL insiders. It then sells those assets to Aphria at even more inflated prices. That leaves Aphria with assets of dubious quality, SOL Global with Aphria shares, and the insiders with piles of cash.
It’s true that Aphria CEO Vic Neufeld, who owns less than 2% of the company, sat on SOL’s Board. It’s also true that SOL realized a substantial profit upon the sale of the international assets.
But that isn’t uncommon, and it by no means does it prove that Aphria overpaid or that parties with close connections got unusual benefits. The cannabis industry, like other emerging industries, is filled with stories of one company realizing a licensing opportunity, securing the license, and then selling for big profits before even beginning construction of a facility. This just happened in New York last week, you may recall.
In connection with the transactions, Aphria obtained an independent appraisal and a fairness opinion from Clarus Securities, one of the more important investment banks involved in the cannabis industry in Canada.
Further, Aphria refutes the charge that its assets are unusable and abandoned by stating that the Jamaican asset, which the short seller claims is worthless, has in fact already delivered 2.5 million grams of cannabis to date.
Plus, Aphria’s South American and Caribbean operations, which is what the short-seller is referring to in the report, are a tiny part of the overall company. Those assets are more about future potential than anything else.
The Facts Point to a Buying Opportunity
Right now, Aphria is trading at its lowest price in 15 months. And we know that the stock more than tripled over a nine-week period last year to more than $22 share, its January peak. It also came within about one dollar of that price in September.
We also know Aphria still has Health Canada‘s seal of approval.
And it maintains all of its distribution agreements through the country, which has stores still starved for inventory amid high levels of demand that even the biggest optimists didn’t predict before full legalization hit on October 17.
We also know, for a fact, that some of the sharpest insiders in the cannabis industry were buying, not selling, Aphria’s stock even after the stock crashed in recent days.
With all that in play and with that kind of discount on shares, I don’t believe there will ever be a better time to add some of Aphria’s stock to your portfolio. In fact, I’ll be putting out an extended version of this report in the next few days.
Investors who lean in here and buy will almost surely be glad they did once the dust settles.
Thanks for being an important part of the National Institute for Cannabis Investors,
Executive Director, National Institute for Cannabis Investors